Call Option

Example: The Wall Street Journal might list an IBM Oct 90 Call @ $2.00. Translation: This is a Call Option. The company associated with it is IBM.  The strike price is $90.00. In other words, if you own this option, you can buy IBM at $90.00, even if it is then trading on the NYSE @ $100.00. The option expires on the third Saturday following the third Friday¹y of October in the year it was purchased (an option is worthless and useless once it expires). If you want to buy the option, it will cost you $2.00 plus brokers commissions. If you want to sell the option, you will get $2.00 less commission.

In general, options are written on blocks of 100s of shares. So when you buy "1" IBM Oct 90 Call @ $2.00 you actually are buying a contract to buy 100 shares of IBM @ $90 per share ($9,000) on or before the expiration date in October. You will pay $200 plus commission to buy the call.

If you wish to exercise your option you call your broker and say you want to exercise your option. Your broker will arrange for the person who sold you your option (For we sys guys and girls a financial fiction: A computer matches up buyers with sellers in a magical way) to sell you 100 shares of IBM for $9,000 plus commission.

If you instead wish to sell (sell=write) that option you instruct your broker that you wish to write 1 Call IBM Oct 90s, and the very next day your account will be credited with $200 less commission. If IBM does not reach $90 before the call expires, the option writer gets to keep that $200 (less commission) If the stock does reach above $90, you will probably be "called." If you are called you must deliver the stock. Your broker will sell IBM stock for $9000 (and charge commission). If you owned the stock, that's OK; your shares will simply be sold. If you did not own the stock your broker will buy the stock at market price and immediately sell it at $9000. You pay commissions each way.

If you write a Call option and own the stock that's called "Covered Call Writing." If you don't own the stock its called "Naked Call Writing." It is quite risky to write naked calls, since the price of the stock could zoom up and you would have to buy it at the market price. In fact, some firms will disallow naked calls altogether for some or all customers. That is, they may require a certain level of experience (or a big pile of cash). 

When the strike price of a call is above the current market price of the associated stock, the call is "out of the money," and when the strike price of a call is below the current market price of the associated stock, the call is "in the money." Note that not all options are available at all prices: certain out-of-the-money options might not be able to be bought or sold. There is no point in writing a “Out of Money Call” as no one in general will be ready to buy that.

Options traders rarely exercise the option and buy (or sell) the underlying security. Instead, they buy back the option (if they originally wrote a put) or sell the option (if the originally bought a call). This saves commissions and all that. For example, you would buy a Feb 70 call today for $7 and, hopefully, sell it tomorrow for $8, rather than actually calling the option (giving you the right to buy stock), buying the underlying stock, then turning around and selling the stock again. Paying commissions on those two stock trades gets expensivey .

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y  Generally the day is the third Saturday following the third Friday.

y  Since the commission is some percentage of the price, the price of the stock being more, you will end up paying a lot of commission, if you go for exercising of the option and then reversing the process.